Caffeinated Growth Ahead

On Wednesday Starbucks (SBUX) held its biannual analyst meeting. I think the stock can go higher from here, as I believe Starbucks really does have a viable expansion plan; that it's working hard at extending its day part; and that the company is executing its business plan at a very high level.

The company kicked off analyst day by announcing plans to build a dizzying 3,000 net new stores in the Americas by 2017. Management also announced plans to aggressively renovate thousands of existing locations over the next five years. Also over the that period, the company sees an additional 1,500 stores in the U.S. alone. Its confidence is bolstered by the fact that the U.S. locations continue to provide positive comparisons. In fact, during the fourth quarter Starbucks was able to sustain a 7% same-store comp -- 2% from an increase in average ticket price and 5% from higher sales. Fourth-quarter U.S. revenue growth is at 17% -- almost back to the 18% record Starbucks was able to achieve in fiscal 2011, after a disastrous period in 2009 to 2010.

We already know Asia is a big opportunity for Starbucks, but at Wednesday's meeting, the company really clarified the opportunity. Right now, the company has a presence in 11 countries in the Asia Pacific region, including in China, operating about 3,294 stores in these areas. The company also has more than 50,000 partners selling all manner of Starbucks paraphernalia. By 2015, management believes it can take the number of stores in Mainland China to over 1,500, up from its current count of 700.

Management believes there are big opportunities in other countries that get little attention, such as Thailand, Singapore, Australia and South Korea. The company's confidence is bolstered by the fact that the regions' economics are so compelling. Store operating margin in Asia Pacific is above 35%, and the reason stores are this profitable is the limited investment and strong first-year sales. In fact, it only takes an average of $250,000 to build a Starbucks location in the region, and the store quickly achieves sales of $700,000. In comparison, a location in the U.S. consumes more than $450,000 in capital to build.

Financially speaking, the business is firing on all cylinders in the Asia Pac region. Starbucks has been able to achieve 11 consecutive quarters of double-digit growth in same-stores sales. In fiscal 2012, the company produced a 35% two-year "stacked" comp. Comps are driven by strong sales, and in fiscal 2008, the average unit in China only did a little over $500,000 in sales. But, as the company has begun to execute better, management has been able to drive that average unit volume up to $886,000.

Beyond store expansion, management has been able to come up with a credible plan to extend day sales. For most units, the biggest sales come before 10 a.m. After that, sales decline until closing. Extending the "day-part" has been a big focus for the last few years. Management finally admitted nobody goes to Starbucks for the food, and it plans to aggressively rework its food offerings over the next few years. The La Boulange Bakery acquisition, as well as the purchase of Evolution Fresh juices, should go a long way toward helping Starbucks broaden out its offerings. Similarly, the to-be-closed acquisition of Tevana (TEA) should help Starbucks diversify away from coffee.

The company plans to aggressively roll out La Boulange Bakery products: Today, they're in 40 stores, but by the end of 2014, they're expected to be in every U.S. That's the plan for Evolution Fresh juices, as well, by that point.

The most interesting part of the company's financial presentation showed that Starbucks will have a strong tailwind, as it is just beginning to benefit from a sharp decline in coffee prices. These peaked in 2008, and the decline is just now starting to hit the bottom line. Management believes fiscal 2013 will see a $100 million net gain from lower coffee prices, and another $100 million windfall in 2014.

Overall the meeting was positive, and I would expect the analyst community to fall all over themselves upgrading the stock. My guess is that most analysts will slap a low-to-mid-$60 price target on the shares, as the company continues to execute very well and management has many good ideas on how to extract more revenue out of each location.

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